Should We Expect a Trade War Between the U.S. and China?

Crisis averted—for now. Last week President Donald Trump met for the first time with Chinese President Xi Jinping at his luxury Palm Beach estate Mar-a-Lago, where the two leaders discussed North Korea and trade, among other topics.

Several times before I’ve commented on the implications of a possible U.S.-China trade war in response to Trump’s repeated calls to raise tariffs on goods shipped in from the Asian giant. On the campaign trail, Trump threatened to name China a currency manipulator and even suggested that, were he to become president, he would serve Xi a “McDonald’s hamburger” instead of a big state dinner.

I’m happy to say that no Big Macs appeared to be on the menu last week. Nor were there any immediate signs of a disastrous trade war. In a much-needed win for Trump, the two leaders agreed on a 100-day assessment of the trade imbalance between the world’s two largest economies. In addition, Xi pledged to give the U.S. better market access to important Chinese industries such as financials and consumer staples. Specifically, he conceded to lift China’s ban on U.S. beef imports, in place since 2003.

Perhaps Trump is the master negotiator he’s always claimed to be.

As encouraging as this news is, it will likely take a while before significant improvement can be made in balancing trade between the two nations. In 2016, the U.S. trade deficit with China stood at a staggering $347 billion, down from $367 billion in 2015.

China’s Importance as a Trading Partner Should Only Increase

My use of the word “crisis” above was not made lightly. China is currently America’s third-largest export market after Canada and Mexico, having bought $116 billion worth of U.S. merchandise in 2016. That’s up from $19 billion in 2001, an increase of 510 percent.

The U.S., in other words, really can’t afford a trade war with such an important trading partner.

On Tuesday, the president tweeted that China would get a “far better” deal with the U.S. “if they solve the North Korean problem.” But then, it’s the U.S. that’s seeking a better deal from the Chinese, not the other way around.

Among the most valuable U.S. exports to China are, in descending order, oilseeds and grains, aerospace products and parts, motor vehicles and electronic components such as semiconductors.

Since 2010, China has been the world’s top purchaser of light vehicles manufactured by General Motors, and today it’s an exploding market for aerospace and defense companies. Between 2010 and 2015, China surpassed Japan, the U.K., Canada and France to become the number one importer of U.S aerospace and defense equipment, according to Deloitte. The Asian country spent $16.48 billion on American-made civilian aircrafts, engines and aviation parts in 2015, up more than 180 percent from five years earlier.

Boeing is currently China’s leading provider of commercial jets. Back in September, the Chicago-based aerospace company announced that China was in need of more than 6,800 new aircrafts over the next 20 years, an ongoing enterprise valued at roughly $1 trillion.

So crucial is the Chinese market that Boeing, in cooperation with Chinese aerospace manufacturer Commercial Aircraft Corporation of China (COMAC), just began construction on a Boeing 737 completion center in the island-city of Zhoushan. The center is Boeing’s first-ever overseas facility. By 2018, it should be capable of delivering as many as 100 737s per year.

Demand for health care goods and services is also set to expand dramatically as the country’s population ages. By 2030, an estimated 345 million Chinese will be over the age of 60, necessitating even more medicines, treatments and medical devices.

Once this 100-day assessment period ends, my hope is that the U.S. and China can continue to work on strengthening trade. China should continue to be a valuable partner as its gross domestic product (GDP) grows and its citizens’ incomes rise. As I shared with you in February, Morgan Stanley projects the country to become a high-income nation sometime between 2024 and 2027. Looking ahead, the Asian country could conceivably become America’s number one export market—provided Trump can hash out a better trade deal without inciting retaliatory trade blockades.

Rosie the Robot, Amazon, and the Future of RAAI

It’s tough to find a kid out there who hasn’t dreamed about robots. Long before artificial intelligence existed in the real world, the idea of a non-human entity that could act and think like a human has been rooted in our imaginations. According to Greek legends, Cadmus turned dragon teeth into soldiers, Hephaestus fabricated tables that could “walk” on their own three legs, and Talos, perhaps the original “Tin Man,” defended Crete. Of course, in our own times, modern storytellers have added hundreds of new examples to the mix. Many of us grew up watching Rosie the Robot on The Jetsons. As we got older, the stories got more sophisticated. “Hal” in 2001: A Space Odyssey was soon followed by R2-D2 and C-3PO in the original Star Wars trilogy. RoboCop, Interstellar, and Ex Machina are just a few of the recent additions to the list.

Maybe it’s because these stories are such a part of our culture that few people realize just how far robotics has advanced today—and that artificial intelligence is anything but a futuristic fantasy. Ask anyone outside the industry how modern-day robots and artificial intelligence (AI) are used in the real world, and the answers are usually pretty generic. Surgical robots. Self-driving cars. Amazon’s Alexa. What remains a mystery to most is the immense and fast-growing role the combination of robotics automation and artificial intelligence, or RAAI (pronounced “ray”), plays in nearly every aspect of our everyday lives.

Today, shopping online is something most of us take for granted, and yet eCommerce is still in its relative infancy. Despite double-digit growth in the past four years, only 8% of total retail spending is currently done online. That number is growing every day. Business headlines in July announced that Amazon was on a hiring spree to add another 50K fulfillment employees to its already massive workforce. While that certainly reflects the shift from brick-and-mortar to web-based retail, it doesn’t even begin to tell the story of what this growth means for the technology and application firms that deliver the RAAI tools required to support the momentum of eCommerce. In 2017, only 5% of the warehouses that fuel eCommerce are even partially automated. This means that to keep up with demand, the application of RAAI will have to accelerate—and fast. In fact, RAAI is a key driver of success for top e-retailers like Amazon,Apple, and Wal-Mart as they strive to meet the explosion in online sales.

From an investor’s perspective, this fast-growing demand for robotics, automation and artificial intelligence is a promising opportunity—especially in logistics automation that includes the tools and technologies that drive efficiencies across complex retail supply chains. Considering the fact that four of the top ten supply chain automation players were acquired in the past three years, it’s clear that the industry is transforming rapidly. Amazon’s introduction of Prime delivery (which itself requires incredibly sophisticated logistics operations) was only made possible by its 2012 acquisition of Kiva Systems, the pioneer of autonomous mobile robots for warehouses and supply chains. Amazon recently upped the ante yet again with its recent acquisition of Whole Foods Market, which not only adds 450 warehouses to its immense logistics network, but is also expected to be a game-changer for the online grocery retail industry.

Clearly Amazon isn’t the only major driver of innovation in logistics automation. It’s just the largest, at least for the moment. It’s no wonder that many RAAI companies have outperformed the S&P500 in the past three years. And while some investors have worried that the RAAI movement is at risk of creating its own tech bubble, the growth of eCommerce is showing no signs of reaching a peak. In fact, if the online retail industry comes even close to achieving the growth predicted—of doubling to an amazing $4trillion by 2020—it’s likely that logistics automation is still in the early stages of adoption. For best-of-breed players in every area of logistics automation, from equipment, software, and services to supply chain automation technology providers, the potential for growth is tremendous.

How can investors take advantage of the growth in robotics, automation, and artificial intelligence?

One simple way to track the performance of these markets is through the ROBO Global Robotics & Automation Index. The logistics subsector currently accounts for around 9% of the index and is the best performing subsector since its inception. The index includes leading players in every area of RAAI, including material handling systems, automated storage and retrieval systems, enterprise asset intelligence, and supply chain management software across a wide range of geographies and market capitalizations. Our index is research based and we apply quality filters to identify the best high growth companies that enable this infrastructure and technology that is driving the revolution in the retail and distribution world.

When I was a kid, I may have dreamed of having a Rosie the Robot of my own to help do my chores, but I certainly had no idea how her 21st century successors would revolutionize how we shop, where we shop, and even how we receive what we buy - often via delivery to our doorstep on the very same day. Of course, the use of RAAI is by no means limited to eCommerce. It’s driving transformative change in nearly every industry. But when it comes to enabling the logistics automation required to support a level of growth rarely seen in any industry, RAAI has a lot of legs to stand on—even if those “legs” are anything but human.

The ROBO Global® Robotics and Automation Index and the ROBO Global® Robotics and Automation UCITS Index (the “Indices”) are the property of ROBO who have contracted with Solactive AG to calculate and maintain the Indices. Past performance of an index is not a guarantee of future results. It is not intended that anything stated above should be construed as an offer or invitation to buy or sell any investment in any Investment Fund or other investment vehicle referred to in this website, or for potential investors to engage in any investment activity.